Activist investors
toast a banner year

By Dan McCrum and David
Gelles

Is any company safe from the agitators? Even Institutional Shareholder
Services, an influential adviser on corporate governance matters,
which is often an ally of activist investors, now has one of them in
its own shareholder register.

ValueAct Capital, an activist hedge fund, last month disclosed a 5 per cent
stake in MSCI, which owns ISS.

The move was only one element in a late flurry of activism that caps a year
in which activists have ousted boards, forced corporate break-ups and
challenged sleepy management teams.

Though the number of 13D filings, which announce when activists have
acquired more than 5 per cent of a stock, is down from previous years,
boards of directors and bankers still see 2012 as a banner year for
activism. Many activists succeeded in pressing companies to return cash or
do a deal, and some of the biggest brand names in the US, including
Netflix and
Procter & Gamble,
came under siege.

And with several activist funds producing investor returns of more than 20
per cent for the year, cash has flooded into the sector. “More money means a
need to find more targets, and larger ones,” says Henry Gosebruch, managing
director in JPMorgan’s mergers and acquisitions team.

There was $57bn dedicated to activist strategies at the end of the third
quarter, according to HFR, the research house, up from $51bn at the start of
the year and $32bn at the end of 2008. The pressure on boardrooms seems
likely to increase.

Chris Young, head of contested situations for Credit Suisse, says: “There is
a tremendous amount of interest from executive suites about vulnerability to
activism and shareholder pressure, particularly in the US but also outside
the US.”

It comes as activists are setting their sights high, and looking overseas.
Bill Ackman, founder of activist hedge fund Pershing Square, swept a
boardroom election at railroad company
Canadian Pacific
and then moved on to the world’s largest consumer goods maker, P&G.

Not everything is going the activists’ way, however. While Ralph Whitworth
of Relational Investors had a good year at Illinois Tool Works, he suffered
in Hewlett-Packard. The investor was invited on to the board in November
2011: too late to influence the $10.3bn takeover of UK software maker
Autonomy that
has since proved disastrous. A person familiar with Relation said that he
had experienced very long turnrounds before, including four years at Home
Depot.

Meanwhile
JC Penney,
the department store chain, is undergoing a strategic overhaul at the urging
of Mr Ackman.
Sales have plunged this
year, taking the share price with it, but the investor likens it
to a private equity style turnround that will ultimately bear fruit.

Nonetheless, the fact that such activists are even in a position where they
are welcomed on to boards reflects their change in stature and influence. A
decade ago, lawsuits were the first response. “Today we get an entirely
different reaction, we don’t get sued any more”, says Barry Rosenstein of
Jana Partners. “Long-only investors will actually call us with suggestions.”

Some are very publicly onside, such as the Ontario Teachers’ Pension Plan, a
Canadian pension fund that worked with Jana to push for a spin out of the
education business from McGraw-Hill, concluded last month.

“Success begets success,” says Daniel Kerstein, head of the strategic
finance group at Barclays. “The more we see activists appearing to create
changes at companies and, through that, profiting for their investors, the
more campaigns we’ll see. It’s self-perpetuating.”

The next wave of activist fights is already shaping up ahead of the spring
“proxy season”, when many public companies hold annual meetings where
activists can wage public battles for board seats.

For instance, after forcing splits at Marathon Petroleum and El Paso, a
natural gas company, Jana has taken its playbook to
Agrium, a
Canadian fertiliser group. Agrium is resisting a split, so investors will
vote on a new slate of candidates for the board proposed by Jana, one of
which includes Lyle Vanclief, a former Canadian minister of agriculture.

Mr Icahn says he expects to stay busy: “One problem with the economy is that
way too may companies are just badly managed and too many boards do not hold
management accountable”. Company directors, consider yourselves warned.

Europe’s
boardrooms gently stirred, not shaken

While agitators have
terrorised the boardrooms of US and Canadian companies this year there
were only 18 disputes put to a shareholder vote in Europe, down more
than a quarter on the year before according to ISS, the shareholder
advisory firm, writes Dan McCrum.

The bulk of those do not even
fit the bill of activism, they are instead brought by concerned retail
investors, billionaires with mixed motives, and companies attempting
creeping control.

A fight over Impreglio, in
what some have called Italy’s first real proxy
fight, is
between the Gavio and Salini families courting a small group of minority
investors.

It reflects the reality of
activism in Europe. Asset managers are primarily the subsidiaries of
banks and insurance companies, where the desire not to offend big
corporate clients has tended to take precedence over shaking up
boardrooms.

Hedge funds which have
attempted to force changes, meanwhile, suffered during the financial
crisis. ISS counts 15 funds that have wound down or abandoned their
activism since 2008, and estimates that assets dedicated to the strategy
in Europe have halved.

Even in the UK, the biggest
market for activists, “there has been a clearly declining trend since
the financial crisis”, says Nelson Seraci of ISS. He says that large
independent money managers and a tradition of communication mean that
the UK market is largely self-correcting. “In general investors are
quite hands on, and they don’t like supporting hedge funds”.

The challenges of European
activism can be seen in the softly softly approach taken at Danone, the
French yoghurt maker, by Trian, the investment group formed by Nelson
Peltz, Ed Garden and Peter May.

When the group announced last
month that it had taken a 1 per cent stake in Danone, its prescriptions
were surprisingly mild: a small dose of belt tightening and cut out
indulgent acquisitions with shareholder money.

Indeed, Trian is instead
acting more like an advocate than an activist, championing what it says
is a cheap stock and asking for a nod from the company that it agrees
and won’t spoil the pitch. Boardrooms are gently stirred, not shaken.

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